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D&O Claim Trends Webinar – Questions Answered

Thank you to all who attended the January 24 free PLUS Webinar “Assessing D&O Claim Trends for 2012” – if you missed it make sure to download the slide deck from the PLUS website.

There were a number of great questions asked by attendees during the Webinar, and we ran out of time to get to them all. After the session ended we reached out to our panelists to answer them:

Q: Are carriers subrogating against “insured persons” after defending a fraud allegation against and insured person that is found guilty after final adjudication?

Answer: If a D&O insurer pays defense costs for an Insured Person who is ultimately subject to a final adjudication of fraud that triggers the fraud exclusion the insurer can try to recoup the defense cost it paid. That recoup is not through subrogation but through the advancement provision in the Policy, which says the insurer advances defense costs subject to the right to recoup those costs if it is determined there is no coverage. The insurer does not need to subrogate but can assert a direct action against the Insured under the advancement/recoupment provision in the Policy. Insurers rarely seek that recoupment because (i) the conduct exclusion is rarely triggered and other coverage defenses are typically identified early enough in the claim to avoid advancing defense costs, and (ii) the Insureds frequently do not have enough money to repay such large amounts.

ARTICLE:

Bloomberg, January 14, 2013
Morgan Stanley Seeks $10.2 Million From Convicted Former Trader
By: David Glovin and David Voreacos
======================

EXCERPT: Insider traders like Joseph F. “Chip” Skowron III must be held responsible for the harm they cause their employers, Morgan Stanley lawyers are set to tell an appeals court in a bid to recover

$10.2 million. Skowron, 43, who is serving five years in prison, was a hedge fund manager at Morgan Stanley’s FrontPoint Partners LLC until he was charged in April 2011 with using inside information to avoid $30 million in losses. Skowron is appealing a judge’s order to pay $10.2 million in restitution to the New York-based bank, which closed FrontPoint after the scandal. The U.S. Court of Appeals in Manhattan is scheduled to hear arguments today in Skowron’s appeal. Morgan Stanley and prosecutors support the order. Separately, the bank sued Skowron for $65 million, part of what his spokesman Montieth Illingworth previously said was its effort to “grind down what remains of Dr. Skowron’s life”…. Today’s argument comes as Skowron, a doctor who trained at Harvard and Yale, completes his first year at the U.S. prison camp in Minersville, Pennsylvania…. At his sentencing in 2011, U.S. District Judge Denise Cote ordered Skowron to forfeit $5 million. She also required him to pay restitution of $5.9 million to five investors that bought FrontPoint’s HGSI stock in block trades just before HGSI announced the clinical-trial results in January 2008. Deutsche Bank AG and Galleon Group LLC were among the funds. At the time of his sentencing, Skowron had a net worth of $22 million. On March 20, the judge ordered Skowron to pay restitution of $3.8 million to a sixth victim, Morgan Stanley, for the bank’s legal fees and $6.4 million to cover one-fifth of his compensation from 2007 to 2010.

Answer 2: My short answer is that anti-subrogation principles would prohibit carriers from subrogating, per se, against insured individuals later adjudicated to have acted dishonestly. I think the question really intends to ask whether carriers preserve and pursue Buss rights (of defense cost recoupment) for insureds later adjudicated dishonest and thus not covered. In my experience, carriers often unilaterally reserve this right of recoupment but rarely “throw good money after bad” by pursuing such recovery. There seems little benefit in pursuing defense costs recoupment from a likely judgment proof individual who may be on his way to a federal penitentiary. I would add that in spite of a carriers’ purported Buss rights (which case law has found must be explicitly reserved prior to advancement); a carriers’ right to recoup such defense costs at all is not free from doubt. I recall a particularly carrier unfriendly decision by Judge Cote in Worldcom to the effect that defense costs incurred by Bernard Ebbers, prior to a jury finding him guilty, could not be recouped (on the theory that the proceeds of the policy are intended to assist insureds in resisting such adverse adjudications).

Q: How much weight should be given to carrier selection? Do their claims settlement services really vary that significantly from one carrier to the next?

Answer: When meeting with insureds and brokers I remind them of the time and effort they put into assessing the primary carriers capabilities, which is important, but the fact of the matter is that when it comes time to settle that “bet the company” claim, which is why they buy the insurance, the primary carrier will be long gone having paid its limit to defense counsel; and the insured will be left with the capabilities of its excess insurer.

That usually leads me to my point about claims paying ability vs. claims paying willingness which as you know are two very different things.

It is recommended to discuss carrier selection with your broker. There is a wide range of experience in the marketplace. In the middle of a claim is a bad time to find out your carrier has not been involved in many big settlements.

Q: You mentioned that some of the reasons for reduced SCA is auditors getting more serious. Any comments on trends in suits against auditors: frequency, share of total D&O settlement?

Answer: Auditors continue to be named in Securities Class Actions.

They are named in cases involving initial and secondary offerings with greater frequency.

On occasion they will contribute towards a settlement, but only a fraction of what D&O defendants will contribute

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